Saturday, June 16, 2012

Why do wealthy people invest in art?

Barclays Wealth Insights Report - June 2012
Do the wealthy buy fine art for the same or different reasons to everybody else?  

Is profit their motivation or do they seek pleasure - or maybe both?

We've become used to thinking that astronomical prices for art are pretty much a function of art being treated as an investment tool for the realisation of capital growth.

Certainly there have been lots of tales of the exponential growth that some have achieved when holding fine art as an asset (see The Scream - the Most Expensive Artwork Ever Sold at Auction).

We hear less about the drop in value of those who have been over-rated.

So how do the wealthy regard the fine art they buy?

Profit or Pleasure? Exploring the Motivations Behind Treasure Trends is a Wealth Insights report published by Barclays this week.  It explores the motivations behind "treasure trends" across the world.

"Treasure assets" are defined as items such as precious jewellery, fine art, wine, antique furniture, classic automobiles and precious metals.

The findings in the report are based on a global survey by Ledbury Research of:
  • more than 2,000 high net worth individuals. In this instance "high net worth" means people in 17 countries around the world (Europe, North America, South America, the Middle East and Asia-Pacific) who had over USD$1.5 million/GBP£1 million (or equivalent) in investable assets - including 200 with more than USD$15 million/GBP£10 million. 
  • a series of interviews with academics, professionals and other experts from around the world
The survey and report provide an in-depth study of investment trends across the world in these treasure assets, as well as offering insight into the financial and emotional motivations for wealthy individuals holding these particular items.

In particular, the report looks at the value that high net worth individuals in the UK and around the globe place on their possessions.

Generic conclusions about why people own treasure assets
  • Wealthy people hold an average of 9.6% of their total net worth in 'treasure' assets
  • Women tend to prefer treasure assets and are less likely to consider their treasure to be a financial investment
  • Only 11% of UK ‘treasure’ assets are held for financial motivations
  • Those wanting less risk and a guaranteed return on their investment tend to invest in treasure with a defined commodity value - such as gold and jewerllary
  • Those who live in more volatile economies tend to invest more in 'treasure' assets - it's seen as more secure
  • The most significant motivation for holding treasure assets was enjoyment - people acquire the treasure because they derive pleasure from it
  • Owning treasure can be social - especially if you get to share it and show it off to people.  
  • In those countries which have more people who have acquired their wealth relatively recently - such as India and China - people are more likely to want to demonstrate their status through the treasure they own.
  • Treasure is "sticky" - in principle, people are willing to trade but in practice they don't
  • People who enjoy owning their treasure are also likely to value it for its social or heritage benefits - and want to pass this on.
  • Selling on inheritance is the rule rather than the exception
    • children don't always value treasure in the same way as their wealthy parents
    • what's a good collectible tends to vary between generations
Expensive works of art, sculptures and furniture can cost significant sums of money to insure, store and maintain. They can also be subject to inheritance taxes, which can be high in some countries, like the U.S. and U.K.
Why invest in fine art?

This post focuses on the conclusions relating to investing in fine art.
When buying a painting, for example, collectors can all too easily let their heart rule their head. The emotional and social attachment to treasure means that investors are extremely likely to make sub-optimal decisions about when to buy, sell or how much to pay.
There are some interesting conclusions as to why wealthy people buy fine art which I thought were worth highlighting.
  • Fine Art is a more enjoyable way of diversifying a portfolio
“Art is one of the few tangible assets that also qualifies as a passion investment. There is more enjoyment in displaying art on your wall than in displaying stock certificates.”
  • Fine art is one of the most popular categories of treasure in terms of the number of high net worth people who have bought fine art
  • fine art is very much seen as an investment favoured by older people 
  • plus people's attachment to their treasure tends to grow as they get older - once bought fine art is an investment people tend to hang onto; 
  • “Once people own something, they start to ascribe value to that object simply through having owned it and that means that they are not willing to sell it at the same price for which they would buy it,”
  • hence younger people are more likely to see art as an investment rather than as an asset to love and cherish
  • however the popularity of fine art is not consistent across the world; those countries which favour fine art are shown in the table below
Countries which prefer to invest in fine art

    #1 preferred investment#2 preferred investment#3 preferred investment
    UK
    Ireland
    South Africa
    China
    Switzerland
    Spain
    USA
    Mexico
    Japan
    Singapore
    • Showing a new investment to people provides a signal as to relative status ie you can afford to buy an expensive painting - however, on average, only in the UK and USA only a small proportion of people own treasure to show off to people (UK: 19%; US 22%)
    • ownership of fine art pictures and paintings has grown significantly in the last 5 years: 
      • then 41% owned pictures and paintings; 
      • today 49% own fine art pictures and paintings
    • paintings are seen as having a more stable value than alternative investments
    The Mei Moses All Art Index, which tracks returns from paintings sold mainly in New York and London, returned 11% in 2011, beating the return from the S&P 500 by about 9%
    • however auction results as an indicator of the state of the market are misleading.  
      • auctions only tell you about the success or otherwise of art transactions which occur in public - for art which is expected to sell.  It says nothing about art not expected to sell at auction or prices of artworks sold in private transactions.
      • art can be difficult to sell.  The report suggests it's not for those who want to maintain their liquidity.
      • prices paid at auction might not reflect scarcity.  The art market inverts normal rules on occasion.  Some of the highest prices are paid for contemporary artwork where the artists have been prolific (eg Damien Hirst and Andy Warhol)
      • people apparently pay more for art on sunny days!
    • fine art sculpture is thought to be an area of growing area of investment in the future
    Just under half of respondents who own fine art sculptures consider their treasure to be priceless.
    • the markets for different classes of art tend to behave differently (eg old masters are regarded as more secure than contemporary art)
    “Investors are more averse to making losses and tend to want to hold onto winners for a longer period of time in the art market than with traditional investments.”
    • hence holding art as an investment means that a collector should diversify if they are to avoid the risks associated with collecting just one artist
    • the value of Art Funds very much depends on the extent to which they offer a high degree of expertise, time and contacts
    • The art market can be manipulated - which is where the exhibitions in the major museums come into play!
    The relatively small size of the art market means that there are more opportunities to create and move markets than in, say, equities or currencies. Even something as simple as exhibiting a work can enhance its value.
    “Collections are more likely to increase in value if they are seen by the general public because art accrues value through exposure. This is particularly important with contemporary art, where the reputations of these artists are still being consolidated.”
    Dr Sarah Thornton - author of Seven Days in the Art World
    The wider economic issues

    In my view, there's a very good argument for bequeathing fine art to museums and art galleries rather than to family members - for one thing it will remain forever identified with the person who bequeathed it
    Passing an art collection down the generations can create a wonderful legacy, but it can also be an unwanted burden.
    However, there's an interesting social utility debate about whether wealthy people do society a favour or a disservice when they invest in fine art and then lend it to a museum.  Would they have helped society more if they had invested in the local economy in the area?

    Those thinking the latter are maybe missing the point if you look at the extent to which museums can regenerate an area and have a very positive impact on local economies!

    1 comment:

    MichelleS... said...

    Last year my husband bought a piece of micro art by the UK's "Hands of Genius" for £20,000. He was recently offered 4.500.000 rubles (about £90,000) by an art investor living in Moscow, for the same piece of art. Art as an investment can go either way. My husband has also lost heavily on sales.

    Michelle Goldstein

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